Hard Money Loans Defined
A hard money loan can be referred to as the short-term borrowing of money from individuals against given collateral. A hard money loan is necessary when you do not have the time to go through the bureaucratic hurdles of acquiring traditional loans from financial institutions. This type of loan is mainly sought by real estate investors as it is flexible and fast. When traditional loan lenders fail to approve a loan, hard loans remain the only option to bail you out.
Traditional lenders require complicated concrete proof, on your credit worthiness before giving a loan. For you to be given a loan the credit score should be extremely high with an excellent recent borrowing history. Getting approved by the traditional lenders can sometimes prove to be hectic and disappointing. Hard money lenders have a different approach. They are less concerned about the borrower’s creditworthiness and more concerned with the property that will be attached as collateral for the loan. When obtaining a hard money loan, the value of a collateral property is usually more important than the credit rating. In general, the amount you can borrow for a loan increases as the value of the property goes up.
A hard money loan generally has higher interest rates which make it more expensive than traditional loans. However, its flexibility, speed, and ease of approval make it a viable option for any investor in need of a short-term loan. The ideal client for these loans is the fix and flip investors who buy a property and keep it long enough before selling it at a profit. This type of loan does have some drawbacks. For instance, the lender may use conservative methods to value a collateral property which may lead to an undervaluation of a property. Also if you delay to repay the loan, as an investor, you generally are not afforded the same protections as owner-occupied consumers.
To access a private loan, you should network with investors, get recommendations, and then find a lender that you feel comfortable with. This method helps you to know the individual who lends money on collateral. You should later reach out to the potential lenders, discuss the terms of the loan and develop a good rapport before signing up for the loan.